Question

Ski West, Inc., operates a downhill ski area near Lake Tahoe, California. An all-day adult lift ticket can be purchased for $75. Adult customers also can purchase a season pass that entitles the pass holder to ski any day during the season, which typically runs from December 1 through April 30. Ski West expects its season pass holders to use their passes equally throughout the season. The company’s fiscal year ends on December 31. On November 6, 2021, Jake Lawson purchased a season pass for $405. Required: When should Ski West recognize revenue from the sale of its season passes? Prepare the appropriate journal entries that Ski West would record on November 6 and December 31. What will be included in the Ski West 2021 income statement and balance sheet related to the sale of the season pass to Jake Lawson?

Answer 1

Ski West, Inc. records the initial sale of a season pass as unearned revenue, a liability since the service has not yet been performed. As ski season progresses, it recognizes portions of this revenue based on the services provided. By the end of 2021, $81 is recognized as revenue on the income statement with the balance reported as a liability on the balance sheet.

Step-by-step explanation:

Ski West, Inc. should recognize revenue from the sale of season passes as the services are provided, which means as the ski season progresses customers have access to the ski facilities. This approach aligns with the revenue recognition principle, indicating that revenue is earned when the service is performed.

On November 6, 2021, when Jake Lawson purchases the season pass, Ski West will make the following journal entry:

• Debit Cash $405
• Credit Unearned Revenue $405

This entry reflects the receipt of cash, which is an asset, and the corresponding increase in unearned revenue, a liability, as the company is obligated to provide skiing services throughout the season. On December 31, the company would recognize a portion of the revenue based on how much of the season has passed. Assuming a 5-month season (December to April), by December 31, one month has elapsed.

The journal entry on December 31 would be:

• Debit Unearned Revenue $81 (1/5 of $405)
• Credit Revenue $81

In the 2021 income statement, Ski West would include $81 in revenue from Jake's season pass, and the balance sheet would show the remaining unearned revenue of $324 as a liability.

Answer 2

a) It will accrue revenue through time. As in November 6th it has the obligation to keep the downhill ski open or return the cash

cash 405 debit

unearned reveue 405 credit

--to record sales of season pass--

unearned revenue 81 debit

service revenue 81 credit

--year-end adjustment for accrued revenue--

Income statetent

service revenue 81

Balance sheet

Liaiblities

unearned revneue 324

Step-by-step explanation:

We must recognize revneue following the acounting pricniples of conservatisim and matching when the time at they occur.

405 is the cost for 5 months (Dec 1st to April 30th)

so 405 / 5 = 81 cost per month

At decmeber 31th we recognize 1 month

ANd this will be the value included in the income statement